Friday, February 17, 2006

Royalty Relief

As if the oil and gas industry didn't have enough trouble defending its record profits for 2005, the media is stirring the pot with displays of outrage over "lost" oil and gas royalty payments from the same companies, under "royalty relief" laws passed in the late 1990s to encourage drilling in the deep waters of the Gulf of Mexico. Careful reading of the case presented in the New York Times and elsewhere reveals the basic flaw in the argument: current relief is a lagged effect from a period when the price of oil was much lower.

If the companies benefiting from royalty relief today had had any notion then that the price of oil would be $60 today, not only would they not have needed--or wanted--royalty relief, but they would have gone deep into debt to drill every conceivable prospect and build all the new production platforms they could. Remember, these companies were struggling to stay afloat with oil below $20 per barrel for all of 1998 and half of 1999, when the most extensive royalty relief was granted by the Clinton Administration.

If we were to revoke this relief now, retroactively, the companies in question would survive. What would not is the future availability of this kind of policy tool to encourage other risky energy endeavors, whether involving long-distance natural gas pipelines, synthetic fuels plants, or biofuels. Having seen the experience of deep water royalty relief, companies might just ask for cash up front, rather than promises of lower taxes later. Who could blame them? You don't have to like these companies to see the importance of keeping our word to them. This argument applies to the threatened revocation of their foreign tax credits, as well.

Note: I will observe Monday's Presidents' Day holiday with a relevant re-run and resume new postings on Tuesday.

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